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X-INEFFICIENCY: Cost that is higher than it needs to be because a firm is operating inefficiently. This is most often seen for firms that have a great deal of market control, especially monopoly. The lack of competition allows a business to pad it's expenses, hire unneeded employees (like relatives), goof off instead of working, and all sorts of other things that lessen production and increase cost. The business is not penalized for these actions, because market control allows the company to extract whatever price is needed to cover cost.

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Lesson 14: Aggregate Supply | Unit 1: The Concept Page: 2 of 20

Topic: Price Level <=PAGE BACK | PAGE NEXT=>

Aggregate supply is the relation between real production, measured as real GDP, and the price level, measured as the GDP price deflator.
  • This is comparable to the relation for aggregate demand and lets us combine both relations to form the aggregate market.
  • How does the price level affect the supply of real production? For markets, the law of supply is that a higher price induces an increase in the quantity supplied. Does this work for aggregate supply, too?
  • How the price level affects real production depends on the difference between the short run and long run.

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AGGREGATE SUPPLY INCREASE, SHORT-RUN AGGREGATE MARKET

A shock to the short-run aggregate market caused by an increase in aggregate supply, resulting in and illustrated by a rightward shift of the short-run aggregate supply curve. An increase in aggregate supply in the short-run aggregate market results in a decrease in the price level and an increase in real production. The level of real production resulting from the shock can be greater or less than full-employment real production.

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APLS

BROWN PRAGMATOX
[What's This?]

Today, you are likely to spend a great deal of time looking for the new strip mall out on the highway seeking to buy either a T-shirt commemorating next Thursday or a birthday gift for your uncle. Be on the lookout for letters from the Internal Revenue Service.
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This isn't me! What am I?

One of the largest markets for gold in the United States is the manufacturing of class rings.
"When you play, play hard; when you work, don't play at all. "

-- Theodore Roosevelt, 26th US president

BPEA
Brookings Papers on Economic Activity
A PEDestrian's Guide
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